The AUD/USD pair dropped and crossed the key support level at 0.6870 (Feb 6 low and Jan 19 low). It has moved below the 50-period moving average and formed a head and shoulders pattern.
Bearish view
- Sell the AUD/USD pair and set a take-profit at 0.6750.
- Add a stop-loss at 0.6950.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 0.6900 and a take-profit at 0.7000.
- Add a stop-loss at 0.6800.
The AUD/USD price remained under intense pressure as it crashed to the lowest level since January 6. It fell to a low of 0.6816, about 4.75% below the year-to-date high. The Australian dollar was trading at 0.6877 on Monday.
US dollar index retreats
A key theme in the financial market was the strong US dollar comeback. The dollar index pared back most of the losses it made earlier this year as it surged to about $104. This dollar comeback happened as investors reacted to the strong economic numbers from the US, which changed the view of what the Federal Reserve will do.
Data from the US have painted a picture that the economy was doing well. The unemployment rate crashed to a multi-decade low of 3.40% as the job vacancy rate jumped to over 10 million people. Many industries like those in the hospitality and manufacturing sector are going through a major labor shortage.
At the same time, it seems like the low unemployment rate is making it difficult to bring inflation lower. Data showed that inflation remained uncomfortably above the 2% target of the Federal Reserve. Retail sales also strengthened, meaning that the Fed will continue hiking interest rates.
The Reserve Bank of Australia has also insisted that it will maintain a hawkish tone in the coming months. Data published last week showed that the labor market remained under pressure as the unemployment rate rose in January. Inflation also remains above 7.8% while the Chinese economic recovery is not as strong as was expected.
The main events to watch this week will be the upcoming minutes by the Federal Reserve that are scheduled for Wednesday. These minutes are expected to show what most officials said during the last meeting in which they decided to hike rates by 0.25%.
AUD/USD forecast
The AUD/USD pair dropped and crossed the key support level at 0.6870 (Feb 6 low and Jan 19 low). It has moved below the 50-period moving average and formed a head and shoulders pattern. This pattern is usually a bearish sign. The Average Directional Index (ADX) has risen to above 25, signaling that the downward trend is still strong.
Therefore, the pair will likely continue falling as sellers target the next key support level at 0.6750. A move above the resistance point at 0.6930 will invalidate the bearish view.
